Bank of America Bullish on Bonds Amidst US Election Uncertainty and Inflation Fears
Bank of America’s chief market strategist, Michael Hartnett, is advocating for a bullish stance on bonds for the remainder of 2023, citing a need for a hedge against stock market volatility and a potential "hard landing" for the US economy. His recent "The Flow Show" note highlights the resilience of Treasury bonds despite a strong GDP outlook and increasing odds of a Republican sweep in the upcoming November presidential elections.
Key Takeaways:
- Bonds as a Safeguard: Hartnett sees Treasuries as a crucial tool for investors seeking protection against turbulent markets and a possible economic downturn.
- "Buy the Rumor, Sell the Fact" Strategy: He predicts that the Sept. 18 Fed rate cut and the Nov. 5 election will serve as "buy the rumor, sell the fact" dates, advising investors to sell stocks after the initial rate cut.
- Inflation Fears and Tariffs: Hartnett contends that investor anxiety revolves around the threat of higher tariffs and potential inflationary policies in the event of a Republican sweep.
- Young Voters and Inflation: With Baby Boomers being outnumbered by Gen Z and Millennial voters in the 2024 election for the first time in 30 years, the focus on low inflation further bolsters the case for bonds.
- Contrarian View on Tariffs: He offers a contrarian perspective, suggesting that new tariffs could be deflationary rather than inflationary, citing a weakened global economic landscape compared to 2018.
Uncertainty Surrounding US Elections
Hartnett’s bullish outlook on bonds comes amidst growing uncertainty surrounding the upcoming US presidential election. Investors are assigning a 75% probability to Donald Trump winning the election, raising concerns about potential changes to fiscal policies, particularly regarding trade.
Despite these anxieties, long-dated Treasury yields have remained relatively stable this week, with the iShares 20+ Year Treasury Bond ETF (TLT) only experiencing a minor dip of 0.4%. This indicates a degree of investor confidence in the bond market, potentially driven by the anticipation of a Fed rate cut.
Inflation Concerns
Hartnett highlighted the prominent issue of inflation in the minds of US voters. While the unemployment rate sits at 4%, the president’s approval rating remains below 40%, suggesting that inflation is a more pressing concern for the electorate.
This sentiment is further underscored by the significance of "cost of living/inflation" as the leading issue for young voters in key battleground states, outpacing "abortion" by a significant margin.
A Contrarian View on Tariffs
The notion that tariffs could be deflationary, rather than inflationary, represents a key aspect of Hartnett’s contrarian argument. He emphasizes that the current global economic context, characterized by weakness and recessionary threats, differs considerably from the robust market conditions of 2018.
He suggests that new tariffs, imposed against this backdrop of economic fragility, could further exacerbate existing weaknesses, leading to a decline in prices.
"New tariffs threaten a weak global economy with recession," Hartnett asserts, adding that such an environment would be marked by tax hikes and heightened business uncertainty.
Implications for Gold and the US Dollar
Hartnett sees this potential scenario as favorable for gold over the US dollar, particularly if a new trade war focuses on technology.
While a weakening global economy could negatively impact the US dollar, gold’s safe-haven status might attract investors seeking refuge from market turmoil, potentially pushing its price higher.
Conclusion
Bank of America’s bullish outlook on bonds, underscored by Hartnett’s analysis, reflects the growing anxieties around the US economy, particularly inflation and potential shifts in fiscal policy. While the potential for a Republican sweep and new trade disputes raises concerns, the market’s recent stability suggests a degree of investor confidence in the bond market. However, the dynamic interplay of political and economic factors remains a significant driver of market volatility, demanding careful attention from investors seeking to navigate this uncertain landscape.
